Expectations, institutions, and growth

This paper studies a strategic model of growth in which firms' accumulation and technological decisions are subject to both friction and external effects. This gives rise to a wide multiplicity of equilibrium behavior, which is consistent with quite different performances of the economy (e.g., bounded vs. sustained growth.) The focus of the paper is three-fold. First, it explores (and even characterizes in certain cases) the technological conditions underlying the different alternative possibilities. Second, it analyzes the relationship between optimality and equilibrium. Third, it proposes institutional arrangements (an optimal tax/subsidy scheme) which induces, at no "distortionary cost" , the selection of the optimal equilibrium path.